Thursday, June 3, 2010

My Letter to National Review--Abolish the FDIC

Subject: Abolish the FDIC
Date: Thu, 3 Jun 2010 11:05:44 -0400

Re: Shadow Bailouts by Kevin D. Williamson

Dear Sirs:
In his May 17 essay titled "Shadow Bailouts" Kevin D. Williamson has exposed the real purpose of the Dodd bill--to socialize credit via the institutionalization of bailouts as a normal government practice. As a consequence moral hazard will reign unrestrained. The resulting chaos will reinforce government's claim that only it can prevent the complete breakdown of the nation's credit system. For this explanation Mr. Williamson deserves our hearty thanks. However, although Mr. Williamson may see clearly into the future, it is his view of the past with which I take a very small and polite issue. To quote from his essay...

"We don't mind bailing out ma-and-pa depositors when a bank goes feet-up, because keeping those depositors guaranteed adds greatly to the stability of the banking system and the economy, encouraging savings and capital formation, and does so at a remarkably low cost to the nation."

Well, we should mind bailing out ma-and-pa depositors, because that is the foundation upon which government is taking over the entire banking system. If there are natural laws of government, one of them must surely be that no government program remains small. Like a cancer it expands until it consumes the host body. The depression-era FDIC is a case in point. At one time only small depositors were guaranteed. But now we find that this guarantee, via the logic of a natural law of government, must be extended to Wall Street millionaires. A more clear-eyed assessment of the FDIC and its purported guarantee would reveal that it is not an insurance program at all. The only way a deposit can be guaranteed is for the banker to hold standard money in sufficient quantity to honor all deposits one hundred percent. Once the deposit has been lent, there can be no guarantee, for to do so would be to guarantee that all loans would be repaid in full with interest. This is impossible. A free and honest banking system would carefully delineate between a deposit, for which the bank retained one hundred percent standard money, and an investment, which would be lent to worthy borrowers chosen by the banker. The investments would be repaid either by the maturing loans or by the banker's capital itself. When loan losses exceed the banker's capital, the bank fails and the investors become general creditors.

Now, some may say that this is terrible, and it is. But in a free market, incompetent bankers would be driven from the market and would never regain their positions. Would you continue to employ a plumber or a roofer who can't fix a leak? It happens, but their incompetence becomes known rather quickly and they are driven from the market. The same with bankers. Incompetent bankers with low capital reserves would find few customers and would be driven from the market. Bankers with better judgement and larger capital accounts would survive.

Banking is a competitive, market-driven business like any other. Our problem is not that the FDIC has been expanded too far but that it was enacted in the first place.

Patrick Barron
20 McMullan Farm Lane
West Chester, PA 19382
Phone: 610-793-3605

1 comment:

  1. Thanks for the notice, Pat. Always appreciate your thoughts. In a world in which the FDIC did not exist, I would not seek to invent it. My point is that, from the point of view of the typical voter, the FDIC is a much less offensive arrangement than is TARP, even though each is a bailout.